Germany is specialising in the downstream stages of industrial production and relocating the labour intensive upstream stages to other countries. Germany, which today is already home to two thirds of the biggest industry fairs of the world, is continuing to evolve in the direction of a bazaar economy.

The value added share in German exports per unit of output is declining rapidly. While, on average, 38% of German exports consist of imports, such imports already account for 55 cents of each additional euro of real exports. This does not mean that export induced value added as such is falling. It only means that export volume and value added have decoupled. German export volume rises by 1.36% for each one percent of additional value added in exports.

The Germans specialise more and more in bazaar activities and earn good money doing so. At the same time, the bazaars channel more and more merchandise per unit of value added through the country. No wonder that Germany has become second world exporting champion after the United States.

Many believe that specialisation in bazaar activities should result in a reduction of value added in exports. But this is not so. Rather, it is in the very nature of international specialisation that value added in exports rises more than proportionally, and specialisation in bazaar activities is no exception. The Cologne Institute for Business Research (IW), also errs when it equates specialisation in bazaar activities to a decline (!) in value added in exports.

The real question concerns the assessment of this specialisation and the associated boom in export induced value added. The answer cannot simply be given by pointing to this boom as such. This cannot be for the simple reason that each and every specialisation is accompanied by a reduction in value added in other sectors that are badgered by import competition. There is such a thing as excessive specialisation.

In order to make an assessment, one has to look at the labour market, as it is this market that must bear the burden of factor movements among sectors. Unfortunately, there is no reason to be optimistic. From 1995 to 2004 a total of 1.26 million (full-time equivalent) jobs were lost in manufacturing and trade. At the same time, no new jobs were created in the rest of the economy. Employment even declined there, with the result that on balance all sectors suffered a loss of 1.29 million (full-time equivalent) jobs.

The coincidence of unemployment and export boom can be explained by the high and rigid wages form which Germany still suffers. They destroy the labour intensive upstream product stages too fast and also impair other labour intensive sectors like textiles, simple services, tourism or construction.

A lot of labour and a lot of capital are released by the labour intensive sectors. The released factors of production push into the capital intensive export sectors that are better able to cope with the high wages. These sectors therefore grow especially fast. But because of their high capital intensity, they can only fully employ the capital. Part of the unemployed are not absorbed there, but move into the welfare state. Economic growth slows while exports boom. The country is suffering from a pathological export boom. And to be clear: It suffers from a pathological boom in export induced value added and not just export quantities.

Since returns to capital are kept low by high wages, very little investment occurs. The excess of savings over investment flows abroad as capital export. It is astounding that many interpret the export boom and the surplus in the German current account, which measures this capital export, as an indicator of the strength of Germany as an investment location.

Hans-Werner Sinn
Professor of Economics and Finance
President of the Ifo Institute

Published under the title "Pathologischer Exportboom", in Süddeutsche Zeitung, No. 72, May 3 2005, p. 21. See also Hans-Werner Sinn, "Basar-Ökonomie Deutschland – Exportweltmeister oder Schlusslicht", ifo-Schnelldienst 6, 2005. Also published in The Financial News (South Korea), The Edge (Malaysia), The Straits Times (Singapore), Taipei Times (Taiwan), Aripaev (Estonia), Danas (Serbia), Financial Mirror (Cyprus), Borsen (Denmark), Diario Economico (Portugal), L'Agefi (Switzerland).